Mexico Business Picks Up For Oil-Service Companies

In Mexico the oil services business is picking up as state-run Petroleos Mexicanos boosts spending in an attempt to halt faltering production.

Oil service providers such as Halliburton and Schlumberger stand to benefit from a combination of larger budgets at Petroleos Mexicanos and historically high returns in country's sheltered energy industry.

Pemex, as the state firm is known, plans investments of nearly $20 billion in 2008, with $4.1 billion going toward offshore operations in the Gulf of Mexico.

At best, the increased spending will halt a decline in oil production that began in 2004. Pemex hopes to keep output stable this year at 3.1 million barrels a day, but many observers expect it to hit 2.8 million barrels a day as the country's easy oil starts running out.

This is pushing Pemex into new areas of higher-cost production. Halliburton is kicking off a $683 million drilling contract this month for 58 wells in southern Mexico. In its 2007 fourth-quarter results, Halliburton said its Latin America operating income rose 30%, mainly from increased well cementing -- a major part of setting up an oil well -- in Mexico and Brazil.

Schlumberger also had a good year. It moved 17 drilling rigs into southern Mexico in the second half of 2007 for two projects where the firm didn't have any existing infrastructure. It also won a $1.4 billion contract to develop Chicontepec, a high-cost basin with pockets of oil spread out over three states.

The trend should continue. Pemex expects total investments to average $22 billion from 2009-2012, up from an average of $12 billion a year during the past five years.

The boom for foreign service firms has not gone unnoticed in Mexico, where the oil industry bars foreigners from owning oil and still celebrates the 1938 expropriation.

Around a dozen students protested on Thursday in front of Halliburton's Mexico City offices, arguing that the company's new drilling contract wriggles around a constitutional ban on foreign oil firms.

"It's illegal, the Constitution bans it," said Miguel Sanchez, a student organizer.

Unlike integrated oil companies that buy oil fields and manage huge production and marketing operations, service firms are hired to set up drilling rigs and cement oil wells. This allows the service firms, who don't buy or sell oil, to fly under Mexico's legal barriers and win contract work with Pemex.

Service firms benefit from only having one client to negotiate with. Opposition parties accuse the Felipe Calderon administration of looking to privatize the industry, which would open a new market for the likes of Exxon Mobil (XOM) but drive down profits for service firms.

"The consensus is that Pemex is being charged at least 25% above the market" for oil services, said George Baker, a consultant who specializes in state-run Petroleos Mexicanos, or Pemex.

Baker said if Mexico opens up its oil industry, "service companies could expect to see a big rollback in the rates they charge" as other oil majors, who hire service firms in other markets, refuse to pay the premiums.

Energy Minister Georgina Kessel has indicated that Mexico's oil industry must become more efficient in deploying its cash.

"It's not an issue of money," she said in a Thursday television interview. "Pemex needs to multiply its ability to execute (projects)."

Copyright (c) 2008 Dow Jones & Company, Inc.